NORTH

AMERICA

ENDURES

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AT A GLANCE

  • Tapping the gap between large regionals and medium narrowbodies is key to efficiently serve mid-size markets with mainline capacity.
  • Pilot shortage is real, but airlines are creating alternatives, while regulators are working their way toward potential improvements.
  • Regional capacity is paramount to US connectivity, and this fact is set to continue. For the next generation airlines will seek the most efficient solution when replacing 600 aging airplanes over the next decade.
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INDUSTRY OVERVIEW

While North American airlines still retains the crown of being, collectively, the most profitable in the industry, the fundamentals continue to slowly fade. EBIT margins have declined from the all-time high 14.4% back in 2015 to a respectable 9.9% forecasted by IATA for 2018. Pricing power, measured in Passenger Revenue per Available-Seat-Mile (PRASM) is also declining since then.

Capacity inflow in the system has been very strong since 2015 – way beyond GDP growth rates. It has only been possible at unit revenue expense, with airlines entering into price wars for the very same passenger and trying to stimulate traffic through lower fares.

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PRASM CONTRACTION

Source: IHS Markit, Sabre, Embraer – March 2018 Correlation: (-0.67)
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THE SMALL NARROWBODY CONCEPT

There is no better way to increase profitability and expand at the same time than using right-sized aircraft, adequately serving peaks and off-peaks, thin and trunk routes with the correct capacity. Currently, for North American airlines, 45% of the flights undertaken by jets with 150 to 210-seats carry fewer than 130 passengers. That’s a reflection of existing fleet-in-service in the region, and represents a huge opportunity to improve return on invested capital. Deploying the so-called small narrowbodies at 10–35% less pilot pay cost (comparing 120-seaters versus 160-seaters), nicely taps the existing capacity gap between large regional jets (76-seats) and mid-size narrowbodies (160-seats).

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PASSENGERS PER DEPARTURE JETS 150 TO 210 SEATS

Source: Innovata, Sabre, Embraer – March 2018
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Aside from new markets, the small narrowbody also enjoys the huge benefit of directly replacing aging fleet in the 100 to 150 seat segment, since North American carriers are, collectively, the largest operator of this aircraft type, nearing 1,500 jets in service with an average age of 16 years.

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PILOT SHORTAGE

A shortage of pilots is a real threat to the airline industry, but many steps have been taken into the right direction. In November 2017, the FAA’s Air Carrier Training Aviation Rulemaking Committee (ACT ARC) issued its recommendations to provide an alternative pathway to the famous “1,500-hour rule”. The Committee’s proposed modification would allow new hires to obtain a certificate with restricted privileges after completing an Enhanced Qualification Program (EQP). With a predefined curriculum, the program would be executed mostly by regional airlines with help from the FAA.

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In short, this new way of thinking equates hours in classrooms and simulators with experience operating an aircraft by accumulating “credits” to reduce the total number of required flight hours.

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On top of that, airlines are pushing to solve the issue themselves. Offering students sponsored education in exchange for employment commitments seems to be working. New pilots are able to reduce their initial training costs and they have a clear, structured career path with a major airline.

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REGIONALS WILL PREVAIL

With regional carriers being the only source of air service in 64% of all US airports and carrying 42% of all US passengers, 50 to 76-seaters continue to be paramount to the existence of US domestic connectivity.

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REGIONAL AIRCRAFT
REMOVAL PROJECTION

Source: Flight Global, Airlines, Embraer – March 2018
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Opportunities in the regional segment are mostly driven by replacing existing aging regional fleets of more than 600 units, which are reaching mid-life and are susceptible to replacement by next generation airplanes, bringing more revenues and comfort when compared to 50-seaters, and also more cost efficiency to the system compared to older 70/76-seaters.

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